Could State Subsidies for Renewable Energy Face Legal Challenges?

August 3, 2017

Last year, the US Supreme Court rejected Maryland’s effort to offer incentives for new gas-fired power plants, ruling that the subsidies impermissibly encroached on the Federal Energy Regulatory Commission’s authority under the Federal Power Act. But the Court, which also declined to review an appellate court decision striking down a similar effort in New Jersey, left open the broader issue of whether states have the power to offer other forms of energy incentives.

Now several cases before the courts are raising just that question, with potentially far-reaching implications for nuclear and renewable energy, although recent decisions in those cases have upheld state subsidies that are not directly tethered to sales of electric energy at wholesale, which are subject to FERC’s exclusive jurisdiction.

At issue in the US Supreme Court case, Hughes v. Talen Energy Marketing et al., was a state program that subsidized new gas-fired power plant construction by requiring local electric utilities to compensate the owner of the plant under a long-term agreement. In its April 2016 ruling, the Court agreed with competing electricity providers and others who were concerned that the incentives would artificially depress wholesale power prices in regional grid auctions regulated by FERC. The Court, however, emphasized the narrow scope of its ruling.

“We reject Maryland’s program only because it disregards an interstate wholesale rate required by FERC,” the decision, delivered by Justice Ruth Bader Ginsburg, reads. “We therefore need not and do not address the permissibility of various other measures States might employ to encourage development of new or clean generation, including tax incentives, land grants, direct subsidies, construction of state-owned generation facilities, or re-regulation of the energy sector.”

While this limited ruling was likely a relief for renewable-energy developers, who were worried that a broad ruling could imperil subsidies for renewable-energy generation, it opened the door to challenges to state subsidies of electric generation. For example, cases working their way through federal courts in Illinois and New York involve challenges to programs in those states to provide “zero emission credits” for nuclear power plants. A similar program has been proposed in Ohio. Challengers to the Illinois and New York programs argue that they are similar to the subsidies struck down by the Supreme Court, while proponents focus on the differences. The US district courts reviewing the Illinois and New York cases recently upheld the zero-emission credits in those states, based in part on findings that the zero-emission credits were not designed to affect—and were not impermissibly tied to—wholesale electric rates that are subject to FERC’s exclusive jurisdiction. Opponents of the Illinois decision promptly filed for review by the US Court of Appeals. 

A related proceeding at FERC is seeking to change the rules for wholesale electric markets to counteract the effect that the nuclear subsidies can have on market prices, and FERC has been collecting comments on what actions should be taken at the federal level to address state subsidies that affect wholesale electric markets. Meanwhile, the US Court of Appeals for the Second Circuit recently issued a decision upholding a program in Connecticut under which local utilities are required to enter into contracts to procure energy from renewable-energy-generation projects, holding that the Connecticut program did not seek to override the terms of a FERC jurisdictional wholesale electric rate, unlike the Maryland program at issue in the Hughes case decided last year by the Supreme Court.

Renewable-energy sources, such as wind, solar, geothermal, and biomass, have long benefited from state programs that require local utilities to generate energy from renewable resources or to purchase renewable-energy credits that subsidize renewable-generating projects. The latest developments in federal courts indicate that state subsidies for renewable energy, including renewable-energy portfolio standards and mandated procurement programs, are safe from challenges, at least for now.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Hugh Hilliard, an O'Melveny counsel licensed to practice law in the District of Columbia and Maryland, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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